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Summary:

Headwinds faced in engineering segment to keep outlook muted, Maintain Reduce Bajaj Electricals (BJE) reported 2QFY14 sales of Rs. 9.6bn, growth of 30.8% yoy, with a muted EBITDA margin of (0.3)% and a loss of Rs. 154mn. Continued losses in the engineering segment (Rs. 433mn at an EBIT level), higher advertisement spend (related to the company’s Platinum Jubilee) and one time consultancy charges (Rs. 60mn) led to muted overall margins during the quarter. The management expects pressure on margin to prevail in 2HFY14 as the company closes old/low margin orders (~30 projects) and expects gradual recovery from FY15. Growth in the lighting segment was strong at 24.4% yoy (lighting and luminaries 28.5% and 18.2% yoy growth) but was muted in consumer durables (13.9% yoy) due to weakness in fans sales (11.1% growth). While the management is confident of sales growth picking up in the upcoming quarters and expects >18% yoy growth in both segments, given moderating demand environment, we expect lighting and consumer durable segments to grow by ~12% and 14% yoy respectively. Increased working capital requirement on the back of higher execution in the engineering segment is expected to lead to higher debt level/interest costs, thereby maintain pressure on PAT. Keeping in mind both medium term strain expected in the engineering segment and moderating growth outlook for the lighting and consumer durable segments, we value BJE at 10x FY15E earnings (on a blended basis) with a target price of Rs. 160. We maintain our ‘Reduce’ rating on the stock. Highlights of the quarter’s performance Lighting segment growth picks up, appliance sales muted – After registering muted growth in 1QFY14, lighting segment grew by a robust 24.4% yoy driven by traction in existing lighting products (CFL) and pick up in luminaries sales. Margins were also better than expected due to price hike across a few products. Growth in consumer durables (13.9% yoy) was below expectation due to sub-par fans sales growth (11.1% yoy). Going forward, given moderating demand environment, we expect lighting and consumer segments to grow by ~12% and 14% in FY14E and FY15E respectively Margin pressure in engineering segment to continue in near term – Engineering segment continued to register cost overruns as the project team closes old sites which have faced considerable execution delays. The management expects to close ~30 old/low margin sites (our of total 70 sites) in 2H. This expected to keep margins under pressure in the near term (Rs. 781mn loss in FY14E) and recover only from FY15 onwards Increased working capital requirement to keep debt levels/interest costs high – Increasing working capital requirement on the back of higher execution in the engineering segments is expected to lead to increase in debt level to Rs. 3.2bn in FY15E (from Rs. 2.5bn currently) and interest costs thereby keeping pressure on PAT

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